Yelp’s potential has analysts a bit starry-eyed

Analysis: Wall Street sees opportunity after recent negativity

SAN FRANCISCO (MarketWatch) — For Yelp Inc., December has been a month full of Grinch-like grumpiness that could, maybe, turn into Christmas cheer.

The company, which lets individuals rate and recommend local businesses, was a viral hit before we basically knew what that was. After all, Yelp
YELP, +1.34%
gets 84 million visitors a month for its 33 million reviews and counting. People go there every day to read about and rate everything from art galleries to the local zoo.

But with numbers like that, can one voice really make a difference in the, um, Yelpisphere? Earlier this month, it happened: A judge in Fairfax County, Va., ordered a homeowner to take down parts of a negative, one-star review written about a contractor. The judge in the matter also ruled that the reviewer couldn’t repeat certain accusations in future posts, and what’s more, the contractor is suing for defamation.

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Yelp also found itself in the sights of Andrew Zimmern, host of the popular Travel Channel show “Bizarre Foods,” and something of a specialist in restaurants and food culture. His late-November takedown of Yelp in his Go Fork Yourself podcast zeroed in on the company’s reviews, saying the site “essentially gives a tremendous forum for a bunch of uninformed morons to take down restaurants.” Listen to Zimmern’s rant on Yelp.

With Grinches like that, Yelp looked like it was due one of those frail-looking Charlie Brown trees for Christmas. Then a funny thing happened on the way to the tree lot.

Some Wall Street analysts have begun showing more support, somewhat tentatively, for Yelp, with three initiating coverage of the stock in the past week. The moves suggest that the San Francisco-based company could overcome what has turned out to be a year of far-lower expectations for much of the social-media sector.

On Monday, Scott Devitt, of Morgan Stanley, started coverage on Yelp, giving the stock a neutral rating, but setting a $22 target price that is more than 12% higher than the Yelp’s current price of $19.57. In a research note, Devitt wrote that Yelp stands to be more than its popular perception of “a digital Yellow Pages directory.”

Yelp

“It enjoys scale and reach unseen by offline directories,” the analyst said, adding that Yelp’s presence in the United States “could be more of an opportunity than a risk, and we believe the company has a potentially long runway of growth in terms of local businesses, users and content.”

That potential comes from what is still a largely untapped, total-addressable market for Yelp’s services. Devitt points to how the site has almost 900,000 “claimed” business listings — where a business owner has an associated account, and has provided some information but hasn’t bought advertising. Only around 4% of such listings are actually paying customers of Yelp, which he sees an indicator of its growth potential.

Stephen Ju of Credit Suisse called the scenario an “underpenetrated addressable market” for local advertising in a research note last week, starting coverage of Yelp with an outperform, or buy rating, and a $25 price target. “It’s currently generating its local-advertising revenue from just 36,000 business, out of over 27 million in the U.S. alone,” he said.

More of that local-revenue opportunity also is going to come from searches via mobile devices. J.P. Morgan’s Kaizad Gotla began his coverage of Yelp last week with a neutral rating and $19 target, saying that the company “is a clear beneficiary of the long-term shift in online usage from the desktop to mobile, as 50% of all mobile searches are local.” Read more about mobile usage and the holiday-shopping season.

Gotla noted that Yelp’s mobile app was used on 8 million unique devices in the third quarter of this year, up from 7.2 million in the second quarter, and that the firm’s mobile site, which includes ads, is showing higher click-through rates for those ads than those on its full-blown site.

Since going public on March 2 at $15 a share, Yelp’s stock hit a high of $31.96 on March 28, then bottomed out at $14.10 on June 4, before easing its way back up to close to $20 over the past few weeks. It’s been an overall neutral year for the company’s market performance.

But with some newfound expectations, there is a sense that 2013 could be a year in which Yelp sees some benefit, and not just controversy, from businesses and the so-called uninformed masses that make up its audience.

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